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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Posted by WARREN MOSLER on March 22nd, 2010

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>   On Mon, Mar 22, 2010 at 10:18 AM, wrote:
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>   Warren, don’t know if you saw this analysis from David Kelly.
>   

Thanks,

My current take is very similar:

Looks to me like this is about health care insurance and not health care per se.

Most all that seems to have happened is that government is now helping/funding up to 30 million more people to purchase private health insurance.

It’s a health care insurance bill, not a health care bill. It uses taxes and medicare cuts to ‘pay for’ private sector insurance company premiums.

So most of the funding goes to insurance companies, a portion of which will then be paid to providers and pharma.

The underlying health care system, with all it’s problems, remains largely unchanged.

It requires insurance companies to accept high risks, extend coverages, etc. and therefore raises costs for the insurance companies. This would raise premiums, however there are some controls on that, which would narrow margins.

This is a very odd mixture- using public funds to subsidize private sector insurance premiums.

After reviewing the timing of expenses and taxes and cuts I agree it doesn’t look like there’s much of an immediate macro issue. Maybe a very small negative bias upfront if some expenses go up.

The Investment Implications of Health Care Reform

By David Kelly

This morning, after almost a year of heated debate, the President has achieved his goal of a major reform to the health care system. Yesterday, the House voted to approve the 2409 page Senate Bill passed in December along with 153 pages worth of amendments, on the understanding that the Democratic majority in the Senate would accept these amendments without alteration. Presuming that Senate Democrats do not renege on their pledge, the combined bills will shortly become law.

So what does all of this mean for investors?

First, we need to recognize that in discussing this issue, like any other issue in investing, it is critical to leave politics and emotion to one side. People have very strong opinions on all sides of the health care debate – they are entitled to those opinions. These comments are solely focused on the investment implications of the combined bills.

So passing over the generally recognized positive of expanding coverage to roughly 30 million of the 50 million U.S. residents who don’t currently have insurance, what does it all mean for the economy and markets?

Taxes: The most obvious quantifiable impact of the bill is an increase in taxes for upper income Americans, particularly on investment income. Starting in 2013, the Medicare tax rate on households with income over $250,000 will be increased from 1.45% to 2.35%. In addition, a new 3.8% Medicare tax will be introduced for the same group on investment income.

Currently, the tax rate on dividends and long-term capital gains is 15%. In 2011, those rates are expected to rise to 20% for households earning over $250,000 and with the new Medicare tax, these rates will rise to 23.8% for the same group. Under current tax law, investors get to keep 85% of the income stream from taxable stock market investments. Under this new law this will be cut by 8.8% to 76.2%, reducing the value of the income stream by 10.4% (that is 8.8% of 85%). This is obviously a significant number. However, it is worth noting three things about this:

* First, roughly half of U.S. stocks are owned by households with income under $250,000 and roughly half are held in non-taxable accounts. Thus, using a number of broad assumptions, the value of the average stock should be reduced by one quarter of 10.4% or 2.6% – not good obviously, but also not an overwhelming reason to avoid stocks after 12 month period in which they rose by over 70% and still appear undervalued.

* Second, this bill does not put stocks at a further disadvantage relative to fixed income. The maximum federal tax rate on bonds and cash accounts is currently 35% and with tax changes coming in 2011 combined with these changes, that maximum rate will rise to 43.4% for households with income over $250,000 in 2013.

* And, third, it’s not like we haven’t been here before. On average over the past 40 years the maximum federal tax on capital gains was 24.7% and the maximum tax rate on dividends was 44.6%.

For the Medical Care Industry, this bill will expand demand without much effort to reign in costs. A combination of federal subsidies and mandates will increase the pool of insured, and while there many constraints preventing insurance companies from limiting coverage there are few which limit how much they can charge for it.

The pharmaceutical industry will benefit for this as well as a plan to remove the donut hole from the Medicare prescription drug benefit program by 2020. Early in the debate on health care, the White House negotiated deals with pharmaceutical, insurance and medical device companies to dissuade them from fighting the reform effort. Under these deals, they appear to retain autonomy on price setting. However, they will pay cumulative taxes of $107 billion between 2011 and 2019. To the extent that they are able to pass these costs on to consumers they may all do OK in this reform, although they may still be a target for future reform efforts.

The American Medical Association and American Hospital Association have both endorsed the health reform effort with a number of reservations. For the most part, the legislation does not interfere with patient-doctor relationships and, by expanding the pool of the insured, will reduce the number of hours which doctors are forced to devote to charity cases. Most doctors are naturally happy to see patients not lose their coverage due to pre-existing conditions clauses, annual caps or non-renewal of existing insurance due to illnesses.

For the Federal Deficit: According to the Congressional Budget Office, the passage of this legislation would reduce federal deficits by a cumulative $143 billion between 2010 and 2019 and by greater amounts in the following decade. However, these estimates should be taken with more than a grain of salt. It is obviously very hard to estimate what total federal health care spending will be over the next decade. However, whatever else is said about this bill there is nothing in it to suggest a reduction in either the quantity or prices of health care services consumed.

* There is no meaningful malpractice reform.
* There is no reduction in drug patent lives.
* There is no compulsion to force insurance companies to compete across state lines.
* There is no effort to limit health care procedures in the last year of life.
* There is no movement in the direction of forcing consumers to confront the cost of services at the point of purchase, and,
* There are no meaningful incentives to force the insured to take better care of their own health.

In fact, for the most part this bill moves away from, rather than towards, the principles of market economics. In 2007, the U.S. devoted 16% of its GDP to health care spending compared to 11% in the country with the second highest spending which was France. Despite this it ranks 38th in the world in life expectancy at birth. Sadly, this bill isn’t likely to change either of these numbers for the better.

For the economy: Despite dire predictions, it’s not clear that health care reform will really slow economic growth that much. Most of the tax provisions don’t kick in until 2013 and the mandates on businesses and individuals don’t kick in in a big way until 2016. Between now and then, the economy is quite capable of staging a full cyclical recovery. It may be that businesses will, in the end, be forced to pay more for the health care of their workers – however, overall, American business is quite capable of limiting wage increases to add to benefit costs. It may be that America as a society ends up spending more on health care. However, if we spend more on health care and less on housing or education or hamburgers, that is our choice. The jobs created in the health care field are American jobs and still some the highest skilled and best paid jobs out there. It should be noted, however, that to the extent that the government incurs more debt to pay for higher health care costs, it probably does mean higher long-term interest rates.

Finally, for politics: The passage of health care reform is a huge victory for the President and it may ultimately work out better for him politically than many Republicans had hoped or Democrats had feared. The economy is improving, and if it continues to do so, many may feel that their fears about health care reform were unfounded. The reality is more complicated. Health care reform wasn’t about to stop the economy in its tracks anyway and the President will be the beneficiary of a cyclical bounce-back which, on its face, appears to owe much more to pent-up demand than government stimulus. Either way the Democrats will lose seats in the mid-term election. However, the end-game for health care reform may well mean less of a swing to the Republicans in November than many had thought.

All in all, a lot to consider but also, more importantly, a lot to keep in proper perspective.

31 Responses to “”

  1. Min Says:

    “This is a very odd mixture- using public funds to subsidize private sector insurance premiums.”

    What’s odd about it? The U. S. has had corporate welfare for many years. It’s business as usual.

    Reply

  2. beowulf Says:

    And the way it cuts $500 billion (over a decade) out of Medicare and shifted it to private insurance subsidies, that’s pretty astonishing. I can accept that there’s that much wasted spending in Medicare. However, we keep hearing that Medicare spending is going to “bankrupt” America, so wouldn’t the logical use of that money be to keep it in the system and shore up Medicare finances? So we need more money for Medicare, but first lets bleed it to fund private insurance (whose costs actually have grown faster over the past decade than Medicare’s)… Nope, no regulatory capture here, move along please. :o)

    I’ve mentioned this here before, but Elliott Richardson proposed a health plan similar to Warren’s in the early 70′s when he was Nixon’s Secretary of Health, Education and Welfare (HEW).
    http://en.wikipedia.org/wiki/Elliot_Richardson

    His “Mega Proposal” combined a federal catastrophic insurance pan (tied to percentage of income ), a negative income tax, federal revenue sharing with state and local governments and an expanded student aid program. Richardson left HEW for the Pentagon in 1973 before he could roll Mega out, and his HEW successor Cap Weinberger soon scrapped it. The health insurance section starts on page 23 of the pdf.
    http://www.eric.ed.gov/ERICWebPortal/custom/portlets/recordDetails/detailmini.jsp?_nfpb=true&_&ERICExtSearch_SearchValue_0=ED080148&ERICExtSearch_SearchType_0=no&accno=ED080148

    Reply

  3. Tom Hickey Says:

    After having had private insurance, been self-insured and now on Medicare, I am convinced that single-payer (Medicare for all) is the way to go. When the billing is compared, the negotiating power of Medicare is awesome. This is clearly the way to bring costs down by eliminating the middleman.

    Reply

    ESM Reply:

    Tom, you are gravely mistaken about the costs of Medicare.

    There is no such thing as negotiating with the government. In the government context, negotiation = price control. The only reason that Medicare gets away with the pricing structure it imposes is because there is private sector insurance which can be charged more by providers to make up the difference.

    But guess what happens when 100% of the system is Medicare? You have rationing by queue or by bureaucratic fiat, instead of by price. If the US went to single payer, you would have more demand for services, yet more doctors leaving practice, and fewer doctors entering practice. Rationing would occur by queue and by bureaucratic fiat, instead of by price. As polls showed rising discontent, you would see the bureaucrats in Washington scrambling to come up with the right prices for medical services in order to balance out supply and demand again. Didn’t the Soviet Union try this?

    Reply

    Tom Hickey Reply:

    My solution is to take the course that government follows in training its career officers at West Point, Annapolis, and the Naval Academy. Make education free for other vital services like health care with a commitment to serve for a specific length of time or repay the tuition.
    The licensed professions have a lock on these professions that keeps the number of providers much lower than it would otherwise be and prevents arbitrage, too. There is no free market is these services because they do involve provision of necessary goods, not discretionary ones. I would like to see all necessary goods under governmental control and all discretionary goods under private control to the degree possible.

    This doesn’t mean that the government has to run everything, but it must be responsible for necessities, and this requires the authority to do so. I would allow private systems, too, but that would be entirely supported by the private sector, with no government subsidies of any kind. The people would be guaranteed basic necessities, and the rich could do as they please. That leaves incentives in place while providing a floor.

    Reply

    Tom Hickey Reply:

    Oops. Should have said “Air Force Academy” instead of “Naval Academy.”

    ESM Reply:

    I don’t see why you need the government to be in charge of necessities. All that means is that we’ll be producing necessities with lower efficiency than we would otherwise.

    A more interesting problem arises when you try to identify basic necessities. I don’t think you’ll find many people agreeing on what is a necessary good and what is a discretionary good.

    Is food a necessity? Well, if you’re starving it certainly is. But if you’re not, it’s kind of a luxury. Health care? Well, for certain kinds of illnesses, medicine is a necessity, but are annual checkups necessary or an MRI for a sore knee?

    How about a car? That’s kind of a necessity for some people. Especially if you’re starving to death, and you need to get to the grocery store to buy some food. A computer? Depending upon the circumstances, I would rather go a day without food than a day without a computer.

    Anyway, I think it’s counterproductive to have the government deciding which goods are necessities and which aren’t, let alone being in charge of their production. If you want to put a safety net under people, give them government checks and let them buy what they consider to be the necessities.

    Tom Hickey Reply:

    Peter F. Drucker: “Efficiency is doing things right, and effectiveness is doing the right things.” Efficiency isn’t the only criterion. In fact, it is secondary to doing the right things.

    beowulf Reply:

    I agree but every dollar of waste is somebody’s profit. And there are a lot of very wasteful companies that benefit from the current setup.

    I suggested to Warren a few months ago that Medicare could be reformed into a universal system along the lines that he (and as I noted above, Elliott Richardson) proposed by converting Medicare payroll taxes into a kind of medical savings account. Medicare taxes are currently 2.9% (1.45% on both employer and employee). Of course that number could go as high as 15.3% if Social Security taxes were eliminated. Whatever the percentage is set, the Medicare taxes you (and your employer) pay become your prepaid deductible. You’d use your Medicare card to bill for any required medical goods or services, paying attention one hopes to the cost of treatment (maybe require that a bill be handed to the patient even though Medicare is being invoiced).

    At the end of the year, you’d get a form listing your annual total of Medicare taxes paid and Medicare expenses incurred. If the expenses are less than the 2.9% (or whatever percentage) of your Medicare taxes paid, you get a refund for the difference. Once expenses reach your tax contribution, you’ve met your deductible and Uncle Sam covers the bill.

    Granted, the poor are unlikely be smart shoppers in any event, but just getting them adequate medical care would be a solid accomplishment. However, the wealthier you are, the more incentive (and likely, ability) you’d have to shop wisely and save money on your healthcare expenses so you could pocket a bigger refund check at the end of every year.

    Reply

  4. vipul Says:

    Almost all of the cuts in Medicare are in the Medicare Advantage program, which gave seniors money to buy private insurance instead of Medicare. So really it’s shifting one private subsidy to another, this time to subsidize insurance for people who have none right now and for business to purchase insurance for their employees. No normal Medicare benefits are cut, as the quoted article also implies.

    Meanwhile many of the insurance reforms were long overdue and mostly good. While it might not be as efficient or simple as Warren’s ideas, or clear cut as single payer Medicare for all, given political realities, it’s not bad. And from the MMT perspective, it’s pretty much a non-event. Deficits will be essentially unchanged in the short term, and I think predictions beyond 10 years are pretty much meaningless.

    Reply

    ESM Reply:

    Medicare Advantage cuts account for approximately $118B out of almost $500B in projected cuts to Medicare. That doesn’t qualify as “almost all” in my book.

    I completely disagree that the insurance reforms are “mostly good.” Taken together, the reforms amount to forcing people to buy much more health insurance coverage than they desire. Why is that mostly good? Also, the reforms amount to forcing young people to subsidize older people. There’s no way congress could get away with directly assessing a tax that was inversely related to age, but that is essentially what they’ve done by mandating community rating on the health insurance industry and by forcing everybody to buy health insurance.

    Reply

    Tom Hickey Reply:

    ESM, if everyone is not covered who covers the people that go to the emergency room that aren’t covered?

    Reply

    ESM Reply:

    I believe that everybody who goes to the emergency room gets a bill. It’s true that most people don’t pay that bill in full, or at all, but part of the reason for that is that the prices are considered (with justification) arbitrary and unfair. If we had a free and transparent market in health care services, I think you’d find that there would be far less uncompensated care. For those that don’t pay even then, well, that is a cost borne by society– similar to the cost borne by society due to crime.

    Tom Hickey Reply:

    Yup, and we spend billions every year on internal security, the legal system, and prisons. Maybe we should rethink the idea that everyone who isn’t otherwise covered should be taken care of in the ER. We might save a bit of money as well as improve society.

    ESM Reply:

    Tom, see the discussion of emergency room care below. It would not be acceptable to society to allow people to die in the street because of lack of coverage. However, it is possible for the government to send them a bill and go after their assets later.

    Tom Hickey Reply:

    ESM, most people who use the emergency room for non-emergency care have no assets. This is a public expense. Not only that, they do not get adequate care in the emergency room. ER’s aren’t set up for that.

    I was talking to a conservative friend yesterday, and she was saying that everyone can get treated at the ER, so what’s the big deal. I said, what if they have a chronic illness like cancer? The ER is not set up for that and they are left without care. She said, Really? I didn’t know that.

    The ER is not only an expensive and inefficient way to deal with non-ER illness, it is also ineffective. W’s answer that everyone can go to the ER, as it that solves the challenge of universal coverage, is just bogus. But a lot of people have been fooled by it.

    ESM Reply:

    Tom,

    If you have no assets, then you are already eligible for Medicaid. With Medicaid, you can get all of the care you need, although, admittedly, some doctors do not accept Medicaid patients because the reimbursement is too low. The problem that the Democrats are trying to address with Obamacare is that of middle class bankruptcy due to illness, not lack of health care per se. An uncovered, middle class person who gets sick often has to decide between going bankrupt and getting the care that he needs.

    So your conservative friend was right, but was wrong about the ER. Everyone can get treated outside the ER too. They just have to spend down all of their assets first.

    Tom Hickey Reply:

    1. Then why are so many people reportedly dying because they don’t get treatment? What was that kid doing standing next to the president at the signing ceremony?

    2. A lot of people who go bankrupt because of health expenses end up not only on Medicaid but also on the dole. A lot of the people affected are families with children. The total cost to society is enormous when everything, including foregone opportunity over the lifetime of these people, is figured in.

    3. Undocumented aliens are treated but don’t qualify for Medicaid. There are reportedly 12 million of the them in the US. A lot of the immigration kerfuffle is about the resources they are using.

  5. vipul Says:

    That’s the way insurance works, you spread the costs among everyone, so that the sick don’t have to pay everything. Reason being at some point, everyone will get old, or sick. But at any one time, only a few are. That’s also exactly how Medicare and Social Security work.

    And they are mostly good because they cannot drop people for getting sick, guaranteed issue, eliminating lifetime limits, etc.

    Where do you get this 500 billion dollars in cuts number from? For example, here the total estimated cuts are 184 billion in medicare over 10 years:

    http://www.csmonitor.com/USA/Politics/2010/0321/Health-care-reform-bill-101-Who-will-pay-for-reform

    Reply

    ESM Reply:

    Vipul,

    See http://www.cbsnews.com/8301-503544_162-20000846-503544.html. The $500B of Medicare cuts has been bruited about for the better part of a year now. These are gross cuts, not net of the closing of the donut hole for Medicare Part D. I imagine the reason why they weren’t listed in your link is that the way those cuts are going to be made is still completely unknown. They’re going to be mostly of the “elimination of waste, fraud, and abuse” variety. But I think there will also be a Medicare commission which recommends cuts that are “binding” on future Congresses (although that strikes me as unconstitutional).

    In any case, the $500B in Medicare cuts were assumed for the purpose of CBO scoring. You have every right to be skeptical that any cuts will be made beyond those to Medicare Advantage.

    And, by the way, insurance is not about spreading costs. It is about spreading risks. When you buy true insurance, you should expect to pay slightly more than the expected present value of your insured claims over the life of your policy.

    Your confusion apparently arises from the fact that Medicare and Social Security are called insurance programs. But they’re not really insurance.

    As far as equity goes, you say that everybody gets old and sick so it’s fair for the young and healthy to pay for the old and sick. But the current old and sick didn’t have to pay for the old and sick back when they were young and healthy. So why is it fair for the old and sick to get these benefits now? Same is true for Medicare Part D. The elderly on Medicare never paid for Medicare Part D when they were younger. Why do they get it now?

    I’m not saying I’m against providing for the needy and the sick, but the question of fairness has to be looked at, um…, fairly.

    Reply

    Tom Hickey Reply:

    “um…, fairly.”

    The devil is in the details, oh, and interest politics. :)

    Reply

  6. vipul Says:

    Can I separate the fairness issue for old versus young from healthy versus sick?

    If you’re reading this site you’ll probably agree that there isn’t really a paying for going on, it’s just a distribution of current resources. So the net effect of this bill with regard to medicare is reduce some of the health resources being spent on the elderly via medicare, and instead distribute them to current uninsured (who are primarily young, and working poor or lower middle class, but not so poor that they could have gotten medicaid). So in that regard, isn’t the fairness improving?

    As for the old never having paid for medicare part d when they were young, medical science had vastly fewer resources to be distributed 40 years ago. So I’m not sure we can just use a straight dollar accounting to determine fairness.

    The healthy versus sick issue is I think tougher, and I am more sympathetic to the argument that the healthy should not completely subsidize the sick. But how do we distinguish the people who are sick by chance (infection, cancer, autoimmune disorders for example), versus people who are sick by bad behavior, like smoking, drinking, lack of exercise, etc. I mean we can pick diseases, like I sort of did but there is a lot of overlap or gray areas. I’m not sure higher health expenses will compel people to lead healthier lives. I think eliminating our agricultural subsidies for corn, or correcting the bias towards sprawling car-centric development are better methods for improving public health.

    One of the things I’ve learned on this site is that it’s not really a question of cost, only resources. Given the fact we have so many people working in sectors like finance, tax preparation, etc, that a truly wasted, it seems like the best solution would be to shift resources from there into health care. Then everyone wins.

    Reply

    ESM Reply:

    Actually, I think the healthy vs sick fairness issue has similarities with the young vs old issue. We hear lots of sob stories about people who were uninsured and got sick or people who had insurance but were dropped after they got sick, or people who had limited insurance, and their expenses went past the annual or lifetime caps. But I think in the vast majority of these cases, you had people who gambled by skimping on insurance. They lost but now they’re being bailed out. And some of them might even be rich.

    It’s reminscent of the people in New Orleans who didn’t buy flood insurance before Hurricane Katrina, even though the price was heavily subsidized, and yet still got bailed out by the government and by charities when their houses were destroyed.

    Yes, we have a screwed up system where if you lose your job, you lose your insurance, and if you’re already sick you can’t get affordable coverage unless you find another job. But that can be remedied quite easily — of course the best remedy is to disentangle insurance from employment.

    That being said, I am not really so cold-hearted. I do want to help these people. But you need to do so in a transparent way, and that means put them on the government dole. The way the new health care reform bill does it is completely dishonest. It uses necessary but widely hated insurance company practices as a pretext to distribute resources in an arbitrary and non-transparent way.

    Reply

  7. beowulf Says:

    ESM,

    The president is wasting time and money on a dead end. I don’t think there’s really an alternative to expanding the existing federal Medicare. It would barbaric to let people to die in the street for want of health coverage, and yet its unfair for the federal government to impose the burden (as current law does) of providing emergency care to everyone without in the process reimbursing the provider through Medicare.

    Private insurance costs have risen faster than Medicare costs over the last decade, and note well, there is no free market in health care. Insurance is the only industry in America that Congress has exempted from anti-trust laws. So who would you trust to fairly set doctors fees, private insurers or Medicare (which contracts with the AMA to regularly adjust its feel schedule)?

    As for a possible physician shortage, I’d just point out that our border guards keep people out, the Soviet Union’s kept people in. If we freely granted a work visa to any qualified doctor who wanted to move here, we’d have a doctor glut. Heck, scratch “move here” for “stay here”. Every year 6,000 or so foreign doctors come here for their medical residency training… and US law requires that once they’re done (unless they get a public service waiver), they must leave the country for at least two years before applying for a visa. If we really had a physician shortage, I suppose step 1 would be to stop ordering thousands of licensed doctors to leave every year.

    Reply

    ESM Reply:

    It is unfair for government to impose the burden of uncompensated care on providers, and you’re right, we can’t deny emergency care to people because of ability to pay. The solution is for government to become the intermediary between the patient and the provider. The government guarantees a Medicare level of payment for otherwise uncompensated care, and then the government goes after the patient for reimbursement.

    Frankly, I suspect that hospitals grossly inflate the numbers on uncompensated care. For example, why does emergency room care cost so much? Shouldn’t it be cheaper? The patients are queued up for optimal efficiency (from the provider’s point of view), and all of the idle resources of the hospital are available with close to zero marginal cost. Emergency room care sucks for the patient because it involves long waits, even if he’s writhing in pain. But it’s a pretty good deal for the hospitals.

    My answer to your question about who I would trust to set doctor’s fees is — consumers, through a free market. Barring that, my answer is private insurers, through a free market. The private insurance market is still pretty competitive in most states. It only takes two to tango, or to create competition. By the way, major league baseball also has an anti-trust exemption.

    I think you have a good idea re increasing the supply of doctors. Allowing more contracting out of services to India and China would help too (e.g. reading MRIs or X-rays). But from what I’ve seen, being a doctor is not such a good deal financially, so I don’t think the problem is that doctors get paid too much.

    Reply

    jcmccutcheon Reply:

    I suppose step 1 would be to stop ordering thousands of licensed doctors to leave every year. Great point. Our immigration policy is insane. Its hard for highly skilled labor to get in but easier for the unskilled.

    Reply

    Tom Hickey Reply:

    That would just deprive other countries of needed physicians. The obvious answer is to increase the number of doctors by training more. The licensed professions are in effect limited and protected in order to increase incomes.

    The incentives are wrong. Education should be seen as investment, and needed professions especially should be subsidized with free education in return for an appropriate commitment to service. The way to decrease health care costs is to increase supply to meet demand, instead of restricting it to jack up the incomes of a few.

    We already fund public education, public transportation, the military, etc. Health care is a public necessity and public investment. It is neither a privilege of the few who are wealthy enough to afford it, nor a commodity to be bid up because of artificial scarcity.

    Tom Hickey Reply:

    The private insurance market is still pretty competitive in most states.

    I have a friend who is an insurance broker. He tells me that the competition operates on the basis of a low first year rate. Then the company jacks up the rate. So you have to switch companies every year to get a competitive deal. Otherwise, not so much.

    The way the game works is that many people don’t switch, and some develop conditions that would prevent them from switching anyway. Then companies jack up the premiums for these pools, until only the most desperate are left in the pool, and they get left holding the bag with enormous rates, or just throw in the towel and join the uninsured. This usually happens are 55-65, when people are on the edge of Medicare and have to pay high premiums to hang on or take their chances by becoming self-insured — after having given the insurance companies tens of thousands of dollars for decades. Even my friend who pimps this stuff admits its a rotten deal.

    Reply

    beowulf Reply:

    I take your point that the consumer is a better price negotiator than private insurance or government. A healthcare system, like the one Warren has proposed, that’d consumers a financial incentive for being smart shoppers (with Uncle Sam covering catastrophic costs) is the best approach.

    I disagree though with the assertion that private insurers would do a better job than the government. Since for-profit companies have a fiduciary duty to maximize earnings, its unreasonable to expect them to protect the interests of citizens whose poverty or ill-health would only drain their profits. Ultimately, the only solution to the problems of freeloading and adverse selection in the provision of a public necessity (and public health is as clearly a core government function as educationclean water or police protection) is having the government provide it, whether directly (the VA) or by contractors (Medicare). And while its true, It only takes two to tango, its the same for price fixing. There is no antitrust regulation of insurance companies. There can’t be a free market– whether there’s two insurance companies or 20– if the purported competitors are allowed to collude in ways that no other industry gets away with (the baseball exemption isn’t b/c of Congress, but rather an odd Supreme Court case from early in the last century). Its like Adam Smith said, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.

    Speaking of antitrust laws, Barry Lynn has a new book out, “Cornered”, asserting that Uncle Sam’s disuse of the antitrust laws on the books has made our economy less competitive and created fewer jobs than in previous decades when the Justice Department vigorously enforced antitrust laws. Here’s an excerpt…
    http://www.washingtonmonthly.com/features/2010/1003.lynn-longman.html

    Reply

  8. vipul Says:

    But like ESM said, Medicare gets away with it’s low fees in part because hospitals and doctors charge higher fees to private insurers. So even if we did Medicare for all, it would have to cost more, or you’d be in a serious fight with doctors.

    Reply

  9. Tom Hickey Says:

    Must read. This is a poison pill for Democrats. It’s even worse than you probably think.

    Think the Democrats Just Scored One For the Little Guy? Think Again

    Reply

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